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Due Diligence: The Difference Between a Successful and Failed Investment

Performing your due diligence when considering a real estate investment opportunity is the single most important step to ensuring an investment that meets your expectations.

Unfortunately most real estate investors that I’ve mentored have shared with me countless tales of errors and assumptions that have cost them severely. For this reason I am sharing an email that I sent this morning to help novice investors to learn.

The following email with attached cashflow analysis asks the questions required to ensure that I can make an informed decision without assumption. It also shows the realtor that I am serious, experienced and respectful of his time.

Let’s analyze the most important inclusions in the above email and attached cashflow analysis and identify the reason they are so important:

MLS listing numbers or links – save the realtor time

Cashflow analysis – showcases experience & intent

Ask for actual numbers – many listings provide estimates or old numbers, always verify these

Ask for answers in writing – protects yourself in the event of mistakes / false numbers

Conditions – describe conditions, best to handle this up front so the realtor can discuss with seller

Tell the realtor that you are experienced and won’t waste his time. He / she is a busy person and you need timely answers to make offers on the best properties before they are sold

Don’t make assumptions in the cashflow analysis – highlight in red anything that requires verification

Perform multiple cashflow analysis based on different mortgage rates – remember they wont’ always be as low as they are today!

Don’t be afraid to show the cashflow analysis to realtors. It not only shows your experience, it also helps in negotiation, especially if cashflow is tight

Ask about vacancies. It is common to list the previous rental amount without providing vacancy information in listings

Most importantly, always follow up every email with a phone call

Within a few hours I received a response from the agent with the answers:

Here’s a list of the items that I may have overlooked without having performed this due diligence. These items require my consideration and/or additional information so that I can finalize my assessment:

Vacancies: 2 vacancies will need to be occupied

Landlord pays electricity for: common areas, mechanical room, hot water for all units. What are these costs?

Roof was done 19 years ago and should be assessed (Soprema elastometer membrane life expectancy is 30 years in optimal conditions)

Windows requires inspection and assessment

I also discovered the following useful information:

Acquisition of several long-term tenants

Property taxes, school taxes and rents are verified

Tenants pay own hydro

Realtor is experienced in formulating offers with appropriate conditions

Because I’ve made it so easy for realtors to work with me, I have more than a dozen realtors proactively presenting me with opportunities on a regular basis; often times before they even hit the market! It’s important for you to realize that every email sent to a realtor is asking for an investment of his / her time. Oh sure… “it’s their job” to provide you with these answers. But it isn’t their job to go out of the way for you. If you show them respect for their time and they know that you’re serious, experienced and pleasant to deal with, most realtors will go out of their way for you.